This work is distributed as a Discussion Paper by the STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH SIEPR Discussion Paper No. 06­16 BROADCASTING AND TEAM SPORTS By Roger G. Noll Stanford University February, 2007 Stanford Institute for Economic Policy Research Stanford University Stanford, CA 94305 (650) 725­1874 The Stanford Institute for Economic Policy Research at Stanford University supports research bearing on economic and public policy issues. The SIEPR Discussion Paper Series reports on research and policy analysis conducted by researchers affiliated with the Institute. Working papers in this series reflect the views of the authors and not necessarily those of the Stanford Institute for Economic Policy Research or Stanford University. BROADCASTING AND TEAM SPORTS by Roger G. Noll Department of Economics Stanford University Abstract Television rights are the largest component of revenues for major sports in large, rich nations. Among these nations, the market structure for rights varies due to different competition policies towards sports and television. This essay examines how game coverage, revenues and competitive balance are affected by competition in commercial television and sales of rights. It argues that consumers are better off if television is competitive and leagues do not centralize rights sales. We conclude that centralization of rights sales does not improve competitive balance or benefit financially weak teams. Finally, while digital telecommunications are making television competitive, ending centralization of sales by leagues requires policy intervention. Forthcoming, Scottish Journal of Political Economy. BROADCASTING AND TEAM SPORTS by Roger G. Noll* Among high­income nations, television broadcasting is an important source of revenues in all of the most important professional sports. In the largest nations, the percentage of total revenue that each major sport derives from television has grown to half or more. In most cases – including football in Europe – this revenue growth has occurred only in the past ten to fifteen years. 1 Despite lucrative revenue flows, professional sports leagues view television with some skepticism, worrying that broadcasts reduce attendance in the short run and overall fan interest, through overexposure, in the long run. Government officials express concerns about sports broadcasting, worrying whether pay­TV should be allowed to capture rights to events that historically have been broadcast on free­to­air stations, whether rights to team sports should be sold by leagues or by teams, and whether a single buyer should be permitted to acquire all of the rights to a major sport. Reflecting conflicting views about these issues, different leagues around the world have adopted different policies and practices regarding the sale of broadcast rights and the distribution of the revenues from rights fees among their members. * Professor Emeritus of Economics, Stanford University 1 For data about television revenue in football in several European nations, see Ascari and Gangnepain (2006), Baroncerlli and Lago (2006), Barros (2006), Buraimo, Simmons and Szymanski (2006), Dejonghe and Canderwghe (2006), Frick and Prinz (2006), and Gouguet and Primault (2006). 1 This article examines three aspects of the economics of broadcasting of team sports. First is the demand for sports rights: what determines the willingness to pay for rights to games in a league among television broadcasters, and how is demand affected by ongoing changes in the structure of the broadcasting industry due to new technology? Second is the supply of sports rights from the perspective of both teams and leagues, including the consequences of centralizing the sale of rights in leagues. Third is policy: how do national broadcast and competition policies affect the performance of both the broadcasting and sports industries, and how has advancing technology altered the economic effects of government policies? The broadcast and team sports industries, despite their interdependence, have sharply contrasting operations. Broadcasting is part of the information technology sector, in which both technology and public policy have undergone revolutionary change in the past two decades. These changes are radically altering the structure of the broadcasting industry, which in turn is causing a substantial increase in demand for broadcasting rights. Meanwhile, team sports stress history and tradition, and pride themselves on rules that inhibit changes in technology and the organization of a sport. While this analysis focuses on team sports, much of the underlying economic forces apply to individual sports as well. The commonality between individual and team sports arises from changes in the broadcast industry. The most popular individual sports – golf and tennis – have experienced the same growth in demand and revenues from rights fees as team sports. An example of the influence of television on sports is its role in inducing North American leagues to expand to cities in the South and West in order to make national television rights more attractive to broadcasters (Jones 1969). 2 The analysis focuses on television rights. Although radio broadcasters participate in the sports rights market, television broadcasters are the dominant participants and exercise far more influence on the operation of the sports industry. The Demand for Sports Broadcasting The natural starting point for an analysis of the economics of sports broadcasting is the demand for program content by broadcasters. Ultimately, the demand for sports television rights is derived from the final demand for broadcast services. The nature of the demand for program content is extremely complex because of heterogeneity among broadcasters in sources of revenues and, as a result, objectives and strategies. In addition, sports events, even in the same sport, are differentiated products that are not perfect substitutes among buyers. The demand side of the market for program content includes broadcasters that can be distinguished in three ways. First, some potential buyers are for­profit firms, while others are “public” broadcasters that are either government agencies or non­profit private entities. Second, potential buyers differ according to how they reach viewers: terrestrial over­the­air broadcasts, direct­to­home (DTH) satellite broadcasts, multi­channel terrestrial digital video broadcasts, cable television, or Internet distribution via broadband access (wire­line telephones, wireless telephones, or cable). Third, potential buyers are further differentiated according to their sources of revenue: whether they sell advertising, whether they charge viewers for programs (directly or indirectly through multi­channel video distribution services), and whether they receive government subsidies. 3 Changing Technology and Policy The television industry is in the midst of revolutionary change that has profound consequences for sports. This revolution has two prongs: the technology for delivering broadcast signals to viewers, and communications policy (Cowie and Williams 1997, Motta, Polo, Rey and Ro "ller 1997, Tonazzi 2003, Van der Wurff 2005). Changes in technology and policy have increased the number of potential buyers of sports rights and in so doing have substantially increased the demand for sports rights, which in turn has caused substantial increases in television income in the most popular spectator sports. In most nations these changes also shifted the balance of purchasing power for sports rights from free over­the­air public broadcasters that are financed primarily by taxes to commercial broadcasters, including pay­TV. The most important technological advance is the development of digital transmission technology for all forms of electronic communications. Advances in microprocessors and other electronics components have vastly increased the amount of information that can be carried on each transmission medium. Cable systems, satellite DTH systems, and terrestrial broadcasters now can squeeze a hundred or more channels into electronic pathways that in 1980 had the capacity to carry twenty or fewer channels. Terrestrial wireless point­to­point telecommunications services, using WiFi, WiMax or third­generation wireless telephone technology, deliver television and other video entertainment over the Internet to personal computers and mobile telephones. For more than thirty years technological visionaries have forecast a convergence of communications technologies that will produce a world in which pathways that 4 historically have been used to deliver distinct services each will gradually expand the range of services it offers until all are offering more or less the same thing. The visionaries were right. Convergence has arrived, and as a result the number of services that are capable of delivering sports programming to consumers has vastly increased and will increase substantially more in the near future. The fact that technology made convergence and competition possible does not mean it actually would occur. The second major revolution affecting television and, thereby, the demand for sports rights was in communications policy. A common misperception is that “scarcity” of the electromagnetic spectrum restricted the structure of the television industry until new technologies created alternatives to over­the­air broadcasting for delivering television signals. In reality, pre­1980s scarcity in television was primarily a policy decision. In most nations a great deal of spectrum